Econometrica: Jul, 1988, Volume 56, Issue 4

Strategic Considerations in Invention and Innovation; The Case of Natural Resources Revisited

https://doi.org/0012-9682(198807)56:4<841:SCIIAI>2.0.CO;2-6
p. 841-849

Trond E. Olsen

Dasgupta et al. (1983) showed that if a resource importing country can commit to the future development of a backstop technology, such a development program can be used strategically to affect the pricing policy of a resource supplier. The analysis showed that early invention is not always better, and it revealed the interesting possibility that by delaying development of the substitute, the importing country could benefit from a favorable production response on the part of the exporting country. In this paper we demonstrate that (i) this effect can indeed occur, but (ii) the set of parameters for which it does occur is smaller than previously realized. In the course of doing so, we develop further the intuition behind this effect.